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Insurance brokers: coming into the regulatory firing line

A series of fines imposed by the Financial Conduct Authority on insurance brokers for failures connected with anti-bribery and corruption in its overseas operations is indicative of greater scrutiny of the insurance sector by regulators in the UK and globally.

Introduction

On 19 December 2013, the UK Financial Conduct Authority which (together with the Prudential Regulatory Authority) was formerly the Financial Services Authority imposed a financial penalty on the Insurance Broker JLT Speciality Limited amounting to GBP 1.876 million.

This penalty was for breaches by JLT in failing to have adequate risk management controls and anti-bribery and corruption systems in place, specifically for their overseas operations.

In March 2014, Besso, also an Insurance Broker was fined GBP 315,000 by the Financial Conduct Authority (the FCA), also for inadequate anti-bribery and corruption systems in place.

These issues are even more pertinent as the FCA has published that it is currently undertaking a thematic review of smaller general insurance brokers’ anti-bribery and corruption systems and controls and because it is still finding weaknesses in these areas. Other areas of thematic review include claims and complaint handling processes, broker conflicts, and financial incentives generally.

This update is in two parts. This first part looks at the criticisms made by the FCA of JLT’s and Besso’s operations and what this means in practice for insurance brokers with international operations. The issues raised are relevant to all UK regulated insurance brokers who may have international operations in the Middle East and elsewhere, around the world.

In the second part of this article, we will take a look at the increased focus by the UAE Insurance Authority and the Dubai Financial Services Authority (the DFSA) on companies and personnel connected with Insurance in Dubai and the requirements outlined by those authorities in adopting a risk based approach to insurance business.

The FCA’s reasons for imposing a fine on JLT

In its Final Notice issued to JLT dated 19 December 2013, the FCA set out details of its investigation and its findings.

It is important to highlight at the outset that whilst the FCA found breaches and failures in JLT’s systems, the FCA did not find any evidence that JLT had allowed any illicit payment or inducement to be paid to an overseas introducer or that it had intended to make such payment. However, the mere fact that such payments could have occurred was enough to allow the FCA to impose a large fine.

The focus of the investigation was on JLT’s overseas operations, in certain high-risk territories, such as the Middle-East and Latin America. In those territories, JLT entered into relationships with overseas introducers that helped JLT win or retain business. The operation of the relationship was that the overseas introducer would simply introduce clients to JLT, across a range of sectors. JLT would then generate revenue from the commissions it received for placing insurance in the market for those clients and JLT would then pay part of that commission to its overseas introducer.

The purpose behind such relationships was to expand the sales network and grant JLT access to a client base in jurisdictions with which they may be less familiar and to assist in introducing business where it may be risky for JLT to be on the ground (such as for security reasons) or to overcome cultural or linguistic obstacles.

Other FCA regulated Insurance Brokers have similar relationships in place and have also faced fines. Aon and Willis were fined in 2009 and 2011 respectively due to the FSA’s similar concerns about the lack of effective anti-bribery and corruption controls in place.

JLT had in place internal policies and procedures, which were set out in various places, including a Code of Conduct within the Employee Handbook and the Group Anti-Bribery and Corruption Policy. There was also an operating procedure manual in place.

The Employee Handbook and the Policy explicitly prohibited the offering, giving or accepting of bribes, including “kickbacks” and facilitation payments. The operating manual contained more detailed procedures which employee had to follow when establishing relationships with overseas introducers.

The FCA found that whilst procedures were set out for employees, JLT failed to ensure that employees were aware of the practical steps that they had to take. As an example, a “red flag” scenario was set out, where an employee learnt of a special relationship between an overseas introducer and foreign public officials. However there was no requirement for employees to take active steps to identify whether there was in fact a special relationship. Similar there was no guidance given on the practical steps that employees had to take to carry out due diligence on whether there was any relationship between an overseas introducer and the introduced client.

Screening software was introduced by JLT as a mechanism of checking links between overseas introducers and public or governmental officials. However, this software was ineffective where the overseas introducer was a company and so the checks carried out were not of the directors or beneficial owners of that company but only the company itself.

The reasons for imposing a fine on Besso

Similarly, with regards to the fine imposed on Besso, the FCA found that whilst procedures and policies were set out in writing, they were not adequate in their content or implementation. The FCA set out in its Final Notice dated 17 March 2014 that Besso’s policies and procedures showed no evidence of a proper risk-based approach, and the due diligence requirements that applied were the same regardless of the actual risk identified.

Practical tips for insurance brokers with overseas operations

Operating in overseas markets can be inherently risky due to the varying business practices in certain jurisdictions and lack of enforcement of controls over bribery and corruption. Particular awareness of higher risk countries and risky prevalent practices is important. On a practical level:

It is important to have detailed procedures and guidance for employees in place, which not only set out what the expected requirements are but how to fulfil those requirements on a practical level.

It is important to ensure that a risk-based approach is set out, so that an explanation is given as to what are higher risk areas and transactions, how these are to be spotted in practice and how they should be dealt with in practice. The same level of due diligence for all transactions and all relationships will not be appropriate and procedures for normal and enhanced due diligence need to be outlined.

Furthermore, prevention of financial crime of this sort needs to be proactively managed within companies, so that employees are not just expected to carry out a “tick box” exercise but to take considered steps to ascertain the nature of the underlying relationship.

A risk based approach needs to be in place, with active steps taken by the company to ensure that staff understand and implement the policies and procedures in place. That encompasses not just regular training of staff, but also rigorous monitoring and testing of the efficacy of the procedures.

As the FCA and other regulators step up their interest in the insurance sector, we expect to see more enforcement cases coming to bear. With fines increasingly being linked to the period of breach and revenues generated by those breaches, insurance brokers would be well advised to take steps now to avoid hefty fines in future.

In our next update, we will look at the approach of the UAE Insurance Authority and the DFSA to these issues; as collectively their ambit covers not only companies incorporated in the UAE but also branches of foreign companies, operating within the UAE.